The legal internets are atwitter with talk of a new paper which suggests that a law degree is worth a million dollars. It’s an interesting exercise in econometric advocacy, and I’m going to spend some time analyzing the authors’ claims.

I’m going to proceed in two parts. First, I’m going to assume for the purposes of argument that the paper’s interpretation of its data is correct in regard to the value of law degrees acquired in the past, and that, as they argue, there is no good reason to assume this value will not be maintained in regard to law degrees acquired in the future. Then I’ll critique those assumptions.

Simkovic and McIntyre estimate “the mean pre-tax lifetime value of a law degree as approximately $1,000,000.” Wary readers will have their suspicions triggered by the words “mean” and “pre-tax.” And indeed the authors’ impressive-sounding conclusion is watered down considerably by looking at their data in terms of median post-tax outcomes. (Taxes are of course an extremely relevant consideration in this sort of analysis, since a law degree must be paid for in post-tax dollars, to service a debt incurred at what under current conditions is a very high interest rate).

The authors estimate that the median post-tax value of a law degree is (or has been, which they treat as the same thing) $420,000. Since they assume a working life of 42 years, they are in fact estimating that for the median graduate a law degree generates a $10,000 annual income premium (in 2012 dollars) over what an otherwise similar college graduates who choose not to go to law school could expect to earn over the course of their lifetimes.

That still sounds like a pretty good outcome, even if it’s not nearly as spectacular-sounding as the headline-grabbing million-dollar claim.

Yet the wary reader will have noticed a striking omission from the argument so far: how much is it going to cost a law graduate to generate this premium? It’s no exaggeration to say that the authors are doing the equivalent of arguing that buying a house is an excellent investment, without factoring into their analysis the fact that acquiring a house usually costs money, and that most of this money is usually borrowed, and then paid back over time.

The authors do try to estimate how much law students are currently paying in tuition, and conclude rather vaguely that law school tuition is a whole lot less than a million dollars. Thus they elect not to include the cost of a law degree in their estimate of its net present value, since “for most law graduates, the net present value of a law degree typically exceeds its cost by hundreds of thousands of dollars.”

A wise man once noted that we are all interested in the future, because that is where you and I (and prospective law students) are going to spend the rest of our lives. And indeed Simkovic’s and McIntyre’s argument is expressly prospective: they claim that going to law school will continue to be a good to excellent investment for the typical law graduate, although not of course for every single person who chooses to go to law school.

To evaluate this claim, we need to know how much getting a law degree is going to cost the typical law graduate who enrolls in law school now. This requires a bit of extrapolation, although to a far more modest degree than the authors’ attempt to extrapolate the lifetime earnings of current prospective law students. The vast majority of law students borrow the vast majority of the cost of attending law school. For the purposes of this analysis I’m going to treat graduate debt at repayment as a proxy for the cost of attending law school, although this is in fact a significant understatement of that cost, since it excludes costs paid out of pocket, and opportunity costs.

The typical law school matriculant who enrolls in law school this fall will have about $200,000 in education-related debt at repayment, six months after graduation. I emphasize that this is a conservative estimate. (For one thing, it assumes that the amount law students borrow will increase by only 3% per year over the next three years, even though in recent years that figure has increased by 5% to 6% per year).

That figure is derived as follows: About 80% of law students are either attending private law schools, or paying quasi-private law school tuition. (Quasi-private law school tuition includes in-state tuition at the several large public law schools where in-state tuition is now as much or more as average private law school tuition – for example in-state tuition at UC-Berkeley is now $51,000 per year — and students paying out of state tuition at public law schools).

If we assume the average amount borrowed by these students will increase by 3% per year, they will borrow a total of around $140,000 during law school. Most of this money will be borrowed at 7.9%, while the rest will be borrowed at 6.8%. Interest will accrue on these loans as soon as they are issued, so total law school debt at repayment six months after graduation will be around $167,000. In addition, people now graduating from college who have debt (70% of all graduates) are carrying an average of about $35,000 in college-related debt.

So the typical law school student who enrolls this fall will have around $200,000 in educational debt, the vast majority of it carrying an interest rate of around 7.5%.

Recall that the authors estimate the median post-tax value of a law degree as $420,000. How much will the typical law student end up paying, in principal and interest, in order to make this investment?

The answer is $444,150 (This assumes graduates will use the “extended” 25-year repayment plan, since at these levels of debt service what used to be called the “standard” ten-year repayment plan will be out of the question for all but a small percentage of very high earners).

Does this mean that, even assuming the authors’ claims about the income premium generated by a law degree are actually correct, a law degree will have negative net present value for the typical matriculant in the class of 2013? Not quite. This is because the authors discount the hypothetical future earnings of current law students to present value. So – again, granting the accuracy of all of their data and methods – the present value of a law degree for people now enrolling in law school would be the difference between $420,000 and the negative net present value of a legal obligation to amortize $200,000 of debt at 7.5% interest over the next 25 years.

What this latter figure is depends on various assumptions about future rates of inflation and the like, but, given recent historical trends (inflation has been considerably less than half of the interest rate law students must pay on their debt), it’s reasonable to assume that the negative net present value of this obligation is somewhere around halfway between the present payoff cost of the debt and the total future income stream necessary to amortize it under its terms. (The authors use a real discount rate of 3%, which is congruent with this assumption).

In other words, if we give the authors’ analysis every possible benefit of the doubt, we would conclude that, after including the cost of the investment in the analysis, the typical pecuniary premium generated by a law degree acquired by matriculants in the class of 2013 will be about $109,000. $109K thus represents the median net present value, if we accept the authors’ calculations, of a law degree, after subtracting both taxes and the net present negative value of the investment cost, discounted at the same rate as the higher earnings.

All these studies are bogus. Not just law degree studies, but everything.

It won’t stop people from writing them, and it won’t stop schools from touting them, and, of course, it won’t stop anybody from saying those dumb millenials should’ve known the studies were bogus and kids these days don’t know the value of work like i did.

Pretty good – but I would include the lost income for 3 years in law school – the opportunity cost, putting the law student in the upper say 25-30% of new college graduates for initial earnings, or at least above the median.

If I did so, to be fair I might subtract much of the cost of living from the calculus for the simple reason that the law students would have had to eat and sleep somewhere in any event.

It’s my impression from reading what you’ve written that the authors are attempting to assess the value of a law degree by looking at the historic wages of practicing lawyers. Was there any attempt to determine how many law graduates have historically not entered legal practice, or how their earnings might affect the calculation of the value of a degree?

Also, at least at my law school, the typical student was not choosing “law school vs. getting a job”. The typical student was going to attend a graduate program, the question being “which one”. (In quite a few cases the question was determined in part by family history and connections – some of my classmates had no reason at all to be concerned that they would not be able to find work upon graduation, even in a down economy, as their “worst case scenario” was having a family member or friend of a family member give them a job.) So at least in my opinion the “value of a law degree” within that context should not be “as compared to a random person with a random bachelor’s degree,” but should include comparison to other graduate programs for which the typical law school graduate would have qualified.

I see from your follow-up that the authors considered people with law degrees in non-lawyer jobs. It would be interesting to know the relative incomes of the two groups (law degree and practicing vs. law degree and not practicing) as well as how the income of the latter group compares to people with degrees more consistent with the non-legal fields in which they work – be that a different graduate degree or no graduate degree – if anybody has crunched the numbers.

One other issue on cost – being a lawyer has costs associated with it that are not transparent to most people and not present in most white-collar jobs, and those are costs beyond simply running your office (computers, printers, stationary, malpractice cover, office space.) To take my situation, costs include having an accountant to do my taxes and paperwork, bar dues (x4), clothing (yes you have to wear nice suits), arranging my own pension, etc., certainly lawyers at partner level. Thos costs – well the accountants would soak up a lot of the premium immediately.

“What this latter figure is depends on various assumptions about future rates of inflation and the like, but, given recent historical trends (inflation has been considerably less than half of the interest rate law students must pay on their debt), it’s reasonable to assume that the negative net present value of this obligation is somewhere around halfway between the present payoff cost of the debt and the total future income stream necessary to amortize it under its terms.”

I can’t tell if this is sloppy, lazy or stupid. Why not just use the discount rate that S&M (hee hee hee) use to move their future income stream into 2012 dollars? Then it’s as much of an apples-to-apples comparison as you can get.

Here, I did it for you. Monthly payments on $200k (7.5%, 25 years) are $1477.98. A monthly income stream of $1477.98 for 25 years at a 3% discount rate (which I THINK S&M [hee hee hee] use) has a PV of $311,671.18.

A simple thought experiment shows that this study is absurd on its face. Suppose that you offered $1 million to anyone with a law degree if they were willing to give it up. What percentage of current degree holders would take that deal? It’s hard to imagine it would be much under 50%. It might well be significantly higher. Which means that the actual value of a law degree, as interpreted by the degree holders themselves, is nowhere near $1 million.

I think the study is a little silly on its face, but I don’t find this persuasive because, and maybe I’m wrong, I think you’re radically overestimating how many people would take the deal. As Aaron says, many lawyers approaching retirement would probably take it. Young recent law school graduates staring a ton of debt in the face who have failed to find steady legal employment and for whom a career shift is more feasible than for someone further along in life might take the deal. Very few who were in the middle of a reasonably successful career would take the deal, I think, and “reasonably successful” doesn’t have to mean “partner at Big Law”. If a person is invested in the current level of luxury they can afford – whether it’s commensurate with a mid-five figures salary or a mid-six figures salary – and they’re staring down the barrel of another 25-30 years before putative retirement, and they have doubts about their ability to successfully make a career transfer without the utility of their law degree, I think plenty of folks would be too risk-averse to take the deal, because the downside is one million dollars making up the bulk of your income for the rest of a longish life, which isn’t nothing! but it’s not as much as it sounds. (I have a mid-five figures salary [no law degree, though!]; my current annual net income, if it stayed the same until I reached my mid-sixties, would accumulate to something more like $1.6 million.)

Although the authors are generally good at not overextending the implications of their study, I expect some will redouble their efforts to argue that the economics of law school are not “broken.” I say redouble because people have always argued to the effect of “a career is longer than nine-months, and a JD provides more money over your life than a BA.”

From a more practical perspective, the problem with looking too far into the future ignores that people have to live in their future. In other words, law students are going to be taking on that $200,000 of debt, and holding it, and making payments on it, long before they begin to see an appreciable benefit from the salary premium. A student applying to law school today wants to know what his economic situation will be in 4 years, 6 years, 10 years.

Although the authors are good at not overextending the implications of their study, others have already redoubled their efforts to argue that this study shows economics of law school are not “broken.” I say redouble because people have always argued to the effect of “a career is longer than nine-months, and a JD provides more money over your lifetime than a BA.”

From a practical perspective, the problem with looking too far into the future ignores that people have to live in their future while its happening. In other words, law students are going to be taking on that $200,000 of debt, and holding it, and making payments on it, long before they begin to see an appreciable benefit from the salary premium. A student applying to law school today wants to know what the economic situation will be in 4 years, 6 years, 10 years. And from looking at the available salary and job data, the numbers still do not add up.

i’m not sneering at $10k, but neither am i much impressed by it: that’s it? that’s the best-case scenario for getting a law degree, that you’ve got a reasonable shot at making $10k a year more than you otherwise would have made? and that’s based on a study that assumes past performance is a guarantee of future results?

even if law school were free, that’s not really that impressive for one of the supposedly elite professions.

my guess would be that all the children in law school think they are above-average (ok, above-median would be the relevant term here, but that’s not what they say in lake woebegone) and are going to do much better than $10k year for their efforts.

That’s the best case, I guess, for a “random guy with a B.A” who gets a law degree straight out of undergrad.

The value of the law degree will vary considerably based upon (a) the law school you attend, (b) your performance in law school, including whether you were a member of a law review and how prestigious that law review was, (c) your summer clerkships – which can help you get a job offer or document your worth to other employers, and (d) your first job out of law school – which has a good chance of defining the rest of your legal career, with your career options likely affected by the state of the economy at the time you graduate. (Did I leave anything out?)

If you are admitted to Harvard or Yale Law School, odds are your degree will end up being worth far more than $1mm if you work for 42 years after graduation. If you go to one of the twenty or so “top ten” law schools, odds are you’ll do better than that $1mm. But the further down the ranks you go, either in terms of your class ranking upon graduation or the caliber of your law school, the less likely it is that you’ll either get a legal job as a result of your law degree or that your legal job will provide you with an appreciable return on your investment.

aaron, i agree completely: that’s the whole point of median, after all, to avoid the distortion of average.

so sure, the differential for the median harvard graduate vs. the median harvard graduate who goes on to law school is probably reasonably healthy, no matter how well-compensated the median harvard graduate is.

but what i’m implicitly say here, and paul has explicitly said for a long time, is that the economics of the median attorney are distinctly unimpressive and we should expect a continued decline in law school attendance and continued efforts by law schools to obfuscate.

You’re preaching to the choir. I’ve been telling people not to go to law school since I was a law student some 20+ years ago. It’s not like the handwriting hasn’t been on the wall for a long time, even if some hope to whitewash over it.

(I may qualify “don’t go to law school” depending on the specific facts – but for people looking for a big paycheck or who “don’t know what they want to do with their lives”, it’s likely to be a disappointment. I doubt that I would discourage somebody from going to Harvard or Yale, but they’re not the ones asking. ;-)

To be fair, at least until recently, when law schools bombed their admission criteria, most law students were substantially above average students – for undergraduate (and IQ/LSAT correlation.) The trouble is that just gave them a shot at being average lawyers.

So there is a strong likelihood that law graduates from the highly selective era – e.g., 80s to early 2000s would have higher than average earnings anyway.

You should exclude the undergrad debt and stick with the $167k. Otherwise your point is well made. Why exclude undergrad debt? The authors will point out that the undergrad debt is there regardless of going to law school, and they’re studying the benefit of law school.

One other thought that I asked the authors, but received no response yet, is why they don’t control for metro area. I suspect that law degree holders are over represented in high income, high cost of living metro areas — more so than even BA holders. If law degree holders are more likely to live in money centers, it is unfair not to control for such geography.

This is a tricky issue I think. It’s true that undergrad debt is a sunk cost, but I’m using total educational debt as a (extremely conservative) proxy for the cost of getting a law degree. Of course taking into account educational debt would slightly reduce the value of an undergraduate degree, but it vastly reduces the value of a law degree relative to an undergrad degree, since the vast majority of law student debt is law school debt.

I don’t see how you’ve established that it’s tricky at all. Nothing about getting a law degree or not changes the present cost of undergraduate degree debt so it should not impact the net present value of the decision to go to law school. It does have something to say about the risk involved though.

They effectively make the claim the consumption bundles represent utility so no need to correct for metro area. The argument is basically that the cost of living in NYC represents the life style benefit of living in NYC. This is not as indefensible as it seems (Google has an office in NYC so apparently at least some people feel that the cost is worth it), but it is questionable.

my question wasn’t one of utility, but one of income. we’re quantifying the wage benefit attributable to being a law degree holder, right? Suppose that there is another X variable associated with higher income. Also suppose that that X variable also is more prevalent among law degree holders than it is among non-law degree holders — it is disproportionate. You want to control for that variable.

I’m saying that the X variable is living in NYC or DC. Wage rates there are higher, other things equal. When you’re dealing with a national study, you should control for metro residence b/c so many law degree holders disproportionately live in these metro areas.

To not control for such residence, I suggest, attributes some of the wage benefit that comes from living in NYC or DC to the law degree, which is inaccurate and improper. It thus could over-inflate the value of the law degree premium.

See, utility address your concern, you’re just not understanding how. What does it mean to say that NYC is more expensive than Boise, Idaho? It means someone has come up with what they compare two equal bundles of consumption goods in the two cities and compared the two costs. But this is actually an impossible exercise. Yes for the same money you will get a smaller living space in NYC and fewer haircuts. But the consumption value of them may be greater or smaller depending on how much you value living in NYC versus Boise. And my point about Google was that people choose to work for them in NYC for the same money as they would get working for them anywhere else, so clearly for some people the utility/dollar is as high in NYC as those other places.

The difference between working for Google in NYC and a big law firm is that with Google you probably have other options and big law firms are all in big cities. So you can’t assume that lawyers who work for big law firms would really make that choice on their own.

Paul – I think you are misusing the concepts of net present value. Simkovic and McIntyre estimate the present day wage premium of a law school at a 6% discount rate (and they do it, I believe for the year a prospective student enters law school). Your $200K debt number is too high, because there is some discount that should be applied to debt incurred in the 2nd and 3rd year of law school.

Also, it is quite straightforward to estimate the net present cost of a 200K 25 year term loan at 7.9% with a 6% discount rate. It is 237K. That still leaves you with nearly $200K in value, which is net present value. It is highly misleading to refer to this as $4K/year (or $2.6K/year as you claim) since the total lifetime premium will be much higher, even after adjusting for inflation. The ideal thing to do would be to subtract payment on student loans from excess income in the years that they occur and then apply a discount rate to the resulting income stream and consider alternative discount rates. But we would need access to the underlying data set. My personal feeling is that a 6% discount rate is too high, but lowering it will actually increase the ratio of earnings premium to debt obligations if much of the earnings premium occur after the 25 year debt term (in the 50-55 year age range).

I think you should be more careful to get the numbers right because it will be exploited by your opponents otherwise. But I don’t think this study poses much difficulty for your current critique of law school anyways. We could debate whether the $200K premium is worth the soul sucking cost of becoming a lawyer and whether a lawyer’s higher consumption bundles really represent enhanced utility (mandatory business suits are really a benefit?). But clearly, the bottom 35% or so of law students should not apply and if this were to occur, the prospects for the remaining 65% would improve dramatically. Also, this study does nothing to address the problem that if you graduate law school in the next 5 years you probably have better than 50% chance of never breaking into the profession simply due to current market weakness and the difficulty of breaking back in further down the road.

If you want to compare the debt to the income premium use the same basis. My calculation assumed 7.9% nominal interest on the loan based on your post. If you are using the nominal interest rate on the debt, you should use the nominal discount rate.

Also, Paul, one thing to keep in mind is that it gets pretty complicated to do the NPV calculation because pre- and post-tax dollars are so fluid in the student loan context. In other words, for some (probably most, but certainly not all) law school graduates, most of their loan payments on a 25 year plan will be paid with pretax dollars (because student loan interest is deductible under a certain income threshold) but your looking at their posttax law degree premium. The complicated part is that you’ll see a lot of people switch back and forth between being under and over that income threshold. (For example, I went firm->government->firm and flipped over or under the thresholds each time.)

You know what the real red flag is? They say their estimate is actually a one with six zeros. A cool mil, on the nose. Of every number to pick. I think they would have seemed vastly more credible if they claimed a JD was worth $0.9M, or $1.1M.

If people are motivated to go to law school by the hope or expectation of earning a good salary, they are going in for the wrong reason. It is such an awful business that there is almost no amount of money that would make its downside worth it, if the money is the only thing it’s about. There are much easier ways of making much more money than toiling at the law.

Many are motivated to go by the hope or expectation of earning a better salary than they would earn in their undergraduate field of study. Which is why many English and political science majors go to law school.

An additional point (which I know you have written about previously) but I didn’t see mentioned in the comparison with taking out a mortgage to buy a house is the unique downside risk associated with non-dischargable debt for educational loans.

Sure, things probably won’t, but if everything does go pear-shaped, you’ve painted yourself into a very difficult spot. How much would the average ex-student pay to undo destroying their entire future?

As someone whose future has been destroyed by the attempt to cheat my way into the middle class via education and hard work, I would give everything I have to undo the mistake. At this point, everything I have is four cans of seltzer, two beers, a bottle of xanax, and an eleven-year-old car.

Excellent analysis, thanks Paul.
This paper is little more than “recruitment propaganda”, much like the Army’s tv ads that show Tom Cruise-types free-climbing rocks in the Moab Valley. Pure fiction.
There’s still lots of undergrads (and their parents) and perhaps non-trads who are looking for confirmation for their decision to go to law school, and they might find it in this drivel dressed up with numbers, which has been printed widely in the mainstream media.
I doubt most of the target audience will read much beyond the first paragraph, let alone detailed breakdowns like this one. “A lie has short legs but it runs faster than the truth,” as the folk saying goes.
Maybe mainstream like NY Times and Washington Post are giving this article space because they feel guilty about the hit-pieces on LS they published earlier (especially the one in the New York Times last winter, which was pretty devastating).
The timing is rather interesting. Prospective students are still deciding if and where they should go, and we can guess that the crappy lower tier schools are in real trouble from the recent news of faculty layoffs. So out comes this puff piece.

something I didn’t see discussed in that paper is economies of scale, with respect to the legal profession. the more lawyers (or any other profession, including doctors) you have, absent a concurrent, equal increase in demand, the lower the median income per lawyer, with a few, rare exceptions. unless there is an equal number of lawyers retiring, every graduating law school class is going to marginally increase the number of lawyers in the population, thus decreasing the value of all lawyers in that same population. the medical profession has long recognized this, and restrict the number of people admitted to medical school each year; it’s rare to see a non-practicing physician, or a poor one.

the authors seem to (to me, anyway) assume a stable number of lawyers in the population, when making their other assumptions. while the number of law school applications, and students, have been decreasing over the past few years, the number of lawyers in the population has still been increasing, with every graduating class. it seems to me that, failing to take this into consideration, raises questions about the accuracy of their basic calculations.

Typically, your group of yahoo fans cheers your posting, but it is clear that you do not understand the concept of net present value. It already considers all of the costs that you keep mentioning. What an idiot. Anyone who follows Campos doesn’t deserve to become a lawyer in the first place. – Signed: A law professor who thinks Paul Campos is a narcissistic butthole.

No Tony, the paper doesn’t include the cost of the investment in calculating the NPV of a law degree. Seems like an odd way of going about calculating such a thing . . . unless you want to advertise a much higher number than even this questionable methodology warrants.

I have one minor (but important) quibble with the analysis (which does not really detract from the overall conclusion). It is improper to include the cost of undergraduate education (or debt taken out for it) in the cost calculation. Yes an undergrad degree is a necessary requirement for law school but the study looked at the premium of a law education over an undergraduate degree. The undergraduate degree represents a sunk cost. It’s the same reason you shouldn’t include living expenses (other than to the extent they cost more than what you would have paid) for the 3 years since you would have to pay to live anyway. Of course you did not include the opportunity cost of lost income so that makes your analysis stronger.